OPEC Reacts to US Shale Oil Boom with New Strategy

The first signs are emerging that key Persian Gulf members of the Organization of Petroleum Exporting Countries (OPEC) are adjusting their strategies to cope with the growing threat that North American shale oil is making to their long-term dominance in global energy markets. The OPEC moves lag behind other international players such as Statoil and Sinochem, who are staking out a major stake in the U.S. shale industry but provide the first insights on how major oil producers might respond over time to the possibility of a future supply glut: Integration through foreign investment.

Liquefied natural gas (LNG) powerhouse Qatar Petroleum (QP) might be next, according to Middle East Economic Survey. QP is considering investment in Canadian or U.S. shale upstream assets as a price hedge for its planned investment along with ExxonMobil to convert the Golden Pass LNG import terminal near Port Arthur, Texas, to an export facility. The QP strategy mirrors Statoil, which aimed to sustain a high growth path through diversification to foreign investment as it hit up against production constraints inside Norway. Qatar is facing possible long-term decline in its future crude oil production as well as an extended moratorium on further development of the massive North Field natural gas field.

Kuwait has been more cautious in its response to the shale boom but its investment arm Aref Energy Holding Company has dabbled profitably in U.S. shale asset investment. Kuwait recently announced it will be studying its own shale resources at home.

Back in the 1980s, vertical integration was a key strategy employed by OPEC’s largest producers to cope with the encroachment of rising non-OPEC production and a related price collapse. The question remains whether the market is about to see a déjà vu or whether geopolitically-driven supply disruptions from traditional production regions like the Middle East or Venezuela will be enough to keep markets balanced in the coming years in the face of new supplies from North America and Africa.

Amy Myers Jaffe is the Executive Director for Energy and Sustainability at the University of California, Davis, with affiliation at the Graduate School of Management and the Institute of Transportation Studies. Jaffe was formerly the Wallace Wilson Fellow in Energy Studies Director, Energy Forum at the James Baker III Institute for Public Policy. She was also the senior editor and Middle East ...

Amy, back in the 1980’s OPEC “coped with encroachment of rising non-OPEC production”, such as the developing U.S. shale oil industry, by flooding the market with their increased production, not the result of the increased non-OPEC production. As a result of OPEC flooding world oil markets, average Persian Gulf and world crude oil market prices dropped by over 60% 1982-86. This action made by the OPEC crude oil monopoly very effectively crushed the U.S. shale oil Industry and most other non-conventional oil production around the world at that time.

Makes sense, if a new competitor to your market arrives do you A: increase supply and drive down prices hoping to bankrupt them and reap higher prices in the future of B: Cut back production increasing prices and profitability for the new competitor.

IK, these would be options if your company is based in developing countries where monopolies and collusion between multiple suppliers were not illegal (as is the case for OPEC). However, if your company originates in the developed countries such as the U.S., EU, Japan, Canada, etc. you might face some major legal challenges for coordinated group manipulation of a given market commodity.

The flooding of the market in 1986 was executed by Saudi Arabia unilaterally, not as part of a coordinated plan by OPEC.

This act had been preceded by an erosion in oil prices from 1981 to 1986 that was a result of increases in non-OPEC production and by persistent and widespread cheating on production quotas by almost all members of OPEC. By the time Saudi Arabia flooded the market, its production had dropped from 7mmbopd to 1 mmbopd in a futile attempt to prop up prices.